Rupee to replace dollar?

The study,authored by RBI Director Rajiv Ranjan and Assistant Advisor Anand Prakash,said the yuan and the rupee are 8220;natural contenders8221; among emerging market currencies for international currency status.

However,China is 8220;far from ready8221; to achieve the global reserve currency status at the moment,while India needs to meet 8220;all the necessary preconditions8230;before it could proceed further,8221; it said.

Internationalisation of rupee would also require India to make the rupee fully convertible. This means that rupee could be exchanged against other currencies freely. There are currently curbs on such convertibility so far as capital accounts like stocks are concerned.

8220;The Indian rupee is rarely being used for invoicing of international trade,8221; the study pointed out.

It further said that 8220;India has so far followed a calibrated approach towards capital account liberalisation.

India,at present,does not permit the rupee to be officially used for international transactions,except those with Nepal and Bhutan,though there are indications of the Indian rupee gaining acceptability in other countries.8221;

The study noted that the strength exhibited by the rupee in recent months and continued good performance of the Indian economy have raised the issue of greater internationalization of its currency and India needs to proactively take steps to increase the role of the domestic currency in the region.

The study also cautioned the Government over the risks associated with 8220;internationalising8221; the rupee as it would increase sharp volatility in the forex markets.

8220;There are,however,problems associated with internationalisation of the rupee as it could increase volatility of its exchange rate,8221; the study said.

Withdrawal of short-term funds and portfolio investments by non-residents could also be a major potential risk of internationalisation of the rupee,it added.

Outlining the difficulty in positioning the Indian currency as a global reserve,the study said that unlike China,which has a large current account surplus,India has a significant trade and current account deficit.

Current account balance broadly relates to exports and imports of goods and services and investment income from global trade.

The idea of 8220;internationalising8221; the rupee and the yuan was mooted,after the global financial crisis and the weakening dollar threw open the debate on alternative global currency.

However,the study also said that it is quite unlikely that the dollar will lose its predominance as the global

reserve currency in the foreseeable future.

8220;The current crisis has,however,thrown open the debate on the need for a new global reserve currency in case the US economy fails to make a significant turnaround and the weakness of the US dollar persists,8221; it added.